An examination of the nature of unsuccessful M&A as illustrated by the attempted BMW AG and Rover Ltd. acquisition

Inhaltsverzeichnis

1. Introduction
1.1 Conceptual formulation
1.2 Definitions of relevant terms
1.3 The Structure of the Dissertation
1.4 Historical background of M&A activities
1.5 Motives and objectives of mergers and acquisitions

2. Due Diligence
2.1 Explanation of the term ‘Due Diligence’
2.2 The content of a ‘Due Diligence’
2.2.1 Market and Commercial Due Diligence
2.2.2 Cultural Due Diligence
2.2.3 Human Resource Due Diligence

3. Post-Merger-Integration Management
3.1 Definition of the term ‘Post-Merger-Integration Management’
3.2 Strategy of integration
3.3 Aims/objectives of integration and success factors
3.4 Implementation of Post Merger Integration
3.4.1 Organizational oriented integration
3.4.2 Personnel oriented integration
3.4.3 Cultural oriented integration

4. Methodology
4.1 Introduction
4.2 Research Design
4.3 Methods
4.4 Limitations

Discussion of the findings

Conclusion and Recommendation

Bibliography:

List of Tables and Figures:

Table 1 Cultural Due Diligence in comparison

Table 2 Comparison of Due Diligence types in GB, G, F and Scandinavia.

Table 3 Risk stages of an M&A process

Figure 1 Number and Transaction Volume of World M&A

Figure 2 Global Automotive M&A Activity

Figure 3 Content of a Due Diligence

Figure 4 Employee behaviour during an M&A process

Figure 5 Integration Strategies

Figure 6 Results of Cultural Integration

Figure 7 Corporate Culture as an Iceberg

List of Abbreviations:

illustration not visible in this excerpt

1. Introduction

1.1 Conceptual formulation

‘An examination of the nature of unsuccessful M&A as illustrated by the attempted BMW AG and Rover Ltd. acquisition’ is the subject of the present dissertation. Furthermore, the reasons which led to the failure and what should have been done to avoid it, will be analysed and evaluated. This dissertation only deals with the most relevant stages of the M&A (Mergers and Acquisitions) process because the whole process from the first contact to the final breakdown lasts too long and would contain too much information, which could not be mentioned in total.

1.2 Definitions of relevant terms

First of all the word ‘Merger’ should be explained at this point. A merger is the purchase of one corporation by another where all assets and liabilities are absorbed by the buyer (www.trading-glossary.com). Furthermore, the expression ‘Acquisition’ is also very significant for this work and means essentially the same thing but is usually reserved for conglomerates buying other corporations. The firm that is expanding simply buys the shares of the purchased corporation. Nevertheless, this is not always as simple as it sounds. In some cases, the management and shareholders of the firm targeted for acquisition are reluctant to let their company become a subsidiary of a purchasing firm (www.acci.gr). In general, we can say that a merger is any combination of two companies.

1.3 The Structure of the Dissertation

After the introduction, the present dissertation will examine the ‘Due Diligence’. This expression will be explained and its huge importance demonstrated. Furthermore, cultural factors that are usually of note in cross-border M&A activities are assessed. ‘Due Diligence’ is followed by ‘Post-Merger-Integration’. ‘Post-Merger-Integration’ and their strategies are the core stage of the BMW-Rover merger and will be the most important aspect in this work as well. Finally, the present dissertation will provide an analysis why M&A often fail and what should have been done to avoid a collapse. Finally, a discussion as well as the author’s recommendation will conclude this work.

1.4 Historical background of M&A activities

Since the middle of the 1990s, the world economy has experienced an unprecedented number of mergers. This enormous amount of mergers and acquisitions can be identified as a ‘Merger Wave’ (Franz 2002 p. 27). From 1990 to 2000 the number of mergers and acquisitions has more than tripled and the transaction volume increased by a factor of 12 (Figure 1). The temporary peak of merger and acquisition activities was reached in the year 2000 but the merger wave has not entirely come to an end today. Figure 2 shows that the M&A activity in the automotive industry decreased from 2002 to 2003 in number of transactions but not in deal value (www.pwcglobal.com). Coming back to the already mentioned merger waves, we have to add that the current wave is the fifth of five more or less distinct waves over the past 100 years (Franz 2002 p. 28).

The first merger wave occurred from 1897 to 1904. It basically reflected the industrial revolution that enabled the exploitation of high economies of scale by the development of the steam engine and the emergence of heavy industries. It led to the establishment of large industrial trusts, which are still prevalent in the old economy of the United States and elsewhere. This first merger wave was characterized by horizontal mergers and acquisitions (www.uni-kiel.de).

In the year 1920, the second merger wave commenced. It lasted until 1929 and was dominated by vertical and conglomerate mergers. During this period of time, the new main focus was directed at branches like the energy sector, trains and railroads that were favoured by the existence of networks. In this way, new opportunities for exploiting economies of scale were opened up (Franz 2002 p. 29).

The period from 1965 to 1975 can be defined as the third merger wave in history. This time it was dominated by the endeavour for economies of scale by industrial mass production in consumer goods industries as well as by the diversification of products and by acquiring companies, which were operating in other markets (Kleinert 2000 p. 18). Within this third merger wave, Germany introduced a merger control in 1973. The United States further strengthened their merger control by the Hart-Scott-Rudino Improvement Act of 1976.

From 1984 to 1988 the fourth merger wave occurred which was less distinctive in the United States than in Europe. At that time companies in Europe were trying to prepare for the completion of the Single European Market by converting national champions into international or at least European ones. The antitrust policy, which was a result of this wave, was the EU directive on Merger Control of the year 1989. The catchwords of this fourth merger wave were synergetic effects, which should be achieved by the assembling of production activities with related technologies (Franz 2002 p. 29/30).

The fifth and last of the five merger waves began in 1995 and is still continuing. It can be typified by the catchwords globalization and deregulation. Basically globalisation leads to an extension of markets and sizes of companies. Deregulation opens up former national monopolies for international competitors. In this way, there are rich opportunities to penetrate foreign markets by cross-border mergers and acquisitions. The most active industries in the current merger wave are those where globalized markets are of particular importance. This applies for instance to the automotive or the pharmaceutical industry (www.uni-kiel.de). As an example for this we can cite that the aggregate value of M&A transactions in the global automotive sector in 2002 increased by 85% to $35.1 billion over 2001 totals. The number of transactions rose by 35% from 462 deals to 621 within the years concerned (www.pwc.com). Telecommunications and utilities where deregulation and liberalisation drastically changed the intensity of the competition are affected as well. This brief historical overview clarifies that M&A activities can be interpreted as the reaction of business to a changing environment.

1.5 Motives and objectives of mergers and acquisitions

With regard to the motives and objectives of mergers and acquisition, the most frequent catchwords are identified as ‘Synergy’, ‘Market Power’ and ‘Diversification’ (Fischer 2000 p. 16/17). A decrease in risk can also be added. Nonetheless, the most common motive generally for every merger is to increase the value of the combined enterprise (www.bus.okstate.edu). In literature, synergy is commonly defined as the ‘2+2=5’ effect as a result of the combined performance and the market posture of the companies, which should be greater than the total of its parts (Fischer 2000 p. 16). Likewise, Sirower holds that synergy is ‘increases in competitiveness and resulting cash flows beyond what the two companies are expected to accomplish independently’ (Sirower 1997 p. 6). The second goal of M&A is gaining ‘Market Power’. Market power is the ability to determine the price, the quality and quantity on the market concerned and to make additional profit (Fischer 2000 p. 16). Possibly, the best example for market power is Microsoft with its operating system Windows. ‘Diversification’ is our next point and usually the main motive behind conglomerate mergers (www.westga.edu). Moreover, diversification leads to a lower risk of a company’s stock, increases its attractiveness to investors and thereby reduces the company’s cost of capital. Nevertheless, diversification cannot only be seen as a possibility to diversify into different markets. In the car industry, a distinction is often made between two different strategic groups of car producers. On the one hand there are generalist producers competing on a full range of cars, e.g. companies like GM, Ford or PSA. On the other hand, specialist producers exist focusing on a particular part of the market. The well-known German sports car manufacturer Porsche is an example for a specialist producer. Referring to BMW, we can say that the motive of the Rover acquisition was to widen the range of cars and to become a generalist producer (www.europa.eu.int). In the year, 1994 when the takeover occurred BMW was only represented in the large, executive and luxury car segment (www.europa.eu.int). Before the acquisition as we know it took place, BMW attempted to buy Land Rover, producer of the ‘Defender’, ‘Discovery’ and ‘Range Rover’ (Brady 2002 p. 9). Due to the fact that British Aerospace Plc., which was the owner of Rover, was unwilling just to sell the ‘crown jewel’ Land Rover, BMW acquired the entire Rover Group although both were represented in the large and executive car segment.

In this way, BMW diversified its range of cars. The fourth motive of mergers and acquisitions, which this work covers, is to achieve a decrease in business risk by operating in several markets. Fischer provides the merger between Daimler and Chrysler as an example for a decrease in business risk (Fischer 2000 p. 17).

2. Due Diligence

2.1 Explanation of the term ‘Due Diligence’

In literature and practice, the term ‘Due Diligence’ can be perceived as a kind of an information gathering process in M&A activities. Likewise, as part of any financial transaction, it is incumbent upon the potential purchaser to obtain as much information as possible about any company being considered for purchase (www.icfconsulting.com). In the case of M&A, due diligence characteristically is conducted in several areas, including financial, human resources and environmental. Furthermore, Due Diligence is practically always carried out by the buyer to obtain an insight into the structure and an overview of the economic background of the company concerned with the aim of risk reduction and to determine a fair price for buying the company. Mainly, due diligence is positioned at the pre-merger stage of an M&A process. The ‘Harvard Business Review on Mergers and Acquisition’ declared that Due Diligence ‘is the most time consuming and least creative part of the process: the deal goes from the high romance of partnership to the mundane world of fact checking’ (Harvard Business Review 2001 p. 29). Nevertheless, due diligence is not only a process in which the potential acquirer gathers all relevant information about the target company or just a break between initial and final negotiations. Moreover, it can be linked closely to business planning and delivers the possibility of obtaining other specific information. As Johannes Sittard, president and COO of ‘Ispat’, which is one of the world’s largest steel companies, said: ‘We use Due Diligence to learn about the people who are running the company and to convince them that joining Ispat is an opportunity for them to grow. These conversations provide information you will never find in a data room’ (Harvard Business Review 2001 p. 31). This quotation clarifies that a well-executed Due Diligence not only covers its task but also provides an introduction to the next stage of M&A, the Post Merger Integration. Furthermore, the significance of due diligence has experienced an increase in recent years. The high proportion of failing M&A can be considered as a reason for this (www.picot.de).

2.2 The content of a ‘Due Diligence’

This component should familiarize the reader with the content of a Due Diligence in detail. As we mentioned above the Due Diligence is conducted into several different areas. Figure 3 illustrates the six most important aspects of a Due Diligence. In practice, an isolated analysis of separate aspects is frequently carried out. Such a way of proceeding can be marked with risk. Due to the isolated contemplation and the close connection of the entrepreneurial areas, a danger of ignoring the risk factors exists. These risk factors are only discernible when they are combined. Furthermore, the risk increases when different areas are analysed by different advisory groups or when there is an insufficient project management or communication. Many companies just examine a limited Due Diligence, which only deals with the so-called ‘hard keys’. In a study, which analysed the success of cross-border M&A transactions of the year 1999, KPMG verified that acquisitions with a Due Diligence, which was limited to financial and legal aspects, had a disappointment rate that was 15% higher than companies, which incorporate environment, culture and HR (Human Resources) in the Due Diligence process (www.kpmg.co.uk). Due to this fact, the present dissertation will identify the Market Due Diligence, the Cultural Due Diligence and the HR Due Diligence to find out how much attention the representatives of BMW paid to these ‘soft keys’. We neglect the following ‘hard keys’: the Financial/Tax, the Legal and the Environmental Due Diligence.

2.2.1 Market and Commercial Due Diligence

We commence our evaluation of the three selected Due Diligence types with the ‘Market Due Diligence. In the past, companies analyzed according to standardized Financial/Tax, Legal and Environmental Due Diligence (Habeck 2002 p. 43). Before we begin our evaluation this work provides a brief overview of the above-mentioned standard Due Diligence types. The focus of the Financial Due Diligence is set on the analysis of the quality of the company’s earning power (www.simon-kucher.com). As the second type, we can note the Legal Due Diligence. Legal Due Diligence deals with commercial and company law. It is primarily the analysis of the company’s legal situation and typically executed by a lawyer. The third form is the Environmental Due Diligence. Environmental Due Diligence is a study that quantifies and evaluates environmental risks. These studies are usually carried out by specialized consultants or environmental institutes. Obviously, the Financial/Tax Due Diligence demonstrates the strengths and weaknesses of the balance sheet and financial indices. As we all know, the problem with balance sheets, profit and loss accounts and financial indices is the past performance. A prediction concerning the future is not given, the competition has not been taken into consideration and the strategic planning is often seen as an extrapolation of past data to avoid logical planning errors. This is the point where the Market Due Diligence (MDD) becomes relevant. The MDD analyses and evaluates the potential company in view of today’s market position and the future performance within the market (www.pwcglobal.com). To achieve this, the internally accessible information concerning market relevant data (volume, price and market share development, organization of marketing/buying, budgeting, quality of communication, price 4 finding processes, product portfolios, and distributor portfolios) are examined and compared with the market demands (customer needs, activities of competitors and statutory boundary conditions) (www.simon-kucher.com). Additionally, potential customers of the company concerned and perhaps suppliers as well as neutral market experts can be consulted. Besides the synergy potential, which can be attained with the acquirer the customer evaluations are also gathered and analysed. Obviously, the evaluation includes all relevant data as well as the potential company to determine the exact competitive position of the candidate. Furthermore, the results of the external company evaluation are also a good assessment of the future development of the demand for the company’s products. The objectives of the MDD are identified as the following:

1. Determination of the competitive position.

The priority of this analysis is given to the exercising of customer needs and the competitive advantage. Besides the evaluation of the past performance, an assessment of the more significant future prospects in a competitive comparison is examined.

2. Analysis of the future potential of the market.

To evaluate the future performance of a market it is essential to carry out a market structure analysis by a structuring and a segmentation of the market. Additionally, the relevant market segments are calculated on a quantity and a value basis.

3. Determination of the potential for synergy.

[...]